assignment video watching and making report
http://www.youtube.com/watch?v=lQUrOQ_zfJE – The importance of Strategy
http://www.youtube.com/watch?v=iyCPqyHRqbo Emerging Economies
http://www.youtube.com/watch?v=0KEXjdbT54U Market Entry
http://www.youtube.com/watch?v=2FzYhdS4pqM Porter on 5 Forces
Carmakers face battle over the best direction to steer industry
By Henry Foy, Motor Industry Correspondent
Stephen Odell, head of Ford Europe, knows all too well the impact of closing car factories. Around two dozen protesters armed with sticks and bats angry at the closure of Ford’s Belgian factory broke into the company’s management offices in Cologne last November, smashed through a glass wall and reached the door to his suite.
But in the worst European car market for 20 years, he is still adamant that more factories must be shuttered to end the red ink that is drowning the continent’s carmakers.
“We have a catastrophic decline in the industry,” says Mr Odell, chairman and chief executive of Ford Europe, Middle East and Africa. “In the end, you have to make the right decisions for the business . . . You can’t fight gravity.”
He is not alone. All of Europe’s volume manufacturers are mired in what could turn out to be the worst sales crash on record, leaving them with about 7m cars per year of unused capacity, cumulative annual losses of about $5bn and eye-watering negative profit margins that analysts see continuing for at least three more years.
“Very few companies, if any, are making money in Europe today,” says Ivan Hodac, secretary-general of the European Car Manufacturer’s Association (ACEA) “In the long run, this is unsustainable.”
Fighting against the tide are Europe’s governments. Politicians from Paris, Rome and Madrid with strong influence on carmakers and a determination to protect employment have made it clear that further shutdowns – at least within their borders – are unacceptable.
“There must be [more closures] and there will probably be some more restructuring,” says Mr Hodac, who represents the EU’s carmakers in Brussels.
Car sales in the EU stood at 13.1m in 2012, down from 16m in 2008, and are on track to fall by around 7 per cent this year, to just over 12m vehicles. EU factories have the installed capacity to build a little over 19.1m cars per year.
The financial impact is that six out of every 10 car factories in the EU are losing money, sparking a race to the bottom on margins as brands desperate to shift vehicles cut prices and ramp up incentives to unsustainable levels.
Many of Volkswagen’s volume competitors blame German obstruction for the lack of a European-wide deal on restructuring, mooted by Fiat chairman Sergio Marchionne and supported by many of his peers across the continent.
Yet those closures equate to a capacity loss of a little over 1m cars per year, or roughly half the reduction required for the continent’s factories to meet the average utilisation level of 75 per cent considered to be profitable, assuming annual sales of 13m cars.
“Some [capacity reduction] is happening . . . but probably not enough for where the industry’s going to be running. I do think there should be more,” Mr Odell says. “It doesn’t make sense. The demand isn’t there . . . There’s a clear consensus that the market is not going to come back quickly.”
Peugeot, highly dependent on the French car market, burnt through $3bn worth of cash last year, while Ford made losses in Europe of $1.8bn. Both say they will work to break even by the middle of the decade.
That is a tall order. Volume carmakers Ford, Opel, Peugeot, Renault and Fiat, which together account for around 42 per cent of EU car sales, ran negative operating margins in 2012 of between 3 and 9 per cent, according to Morgan Stanley research.
Want a new car but not willing to pay the list price? No problem. Just ask the dealer to sell it to themselves, and then buy the used car a few days later at a heavy discount.
“Self-registrations”, a dark art employed by dealers to shift more cars, is on the rise in Europe’s gloomy market, alongside heavy discounting and other financial incentives as manufacturers and showroom managers frantically look to keep the tills ringing.
But as bitter a pill as billion-dollar losses are to swallow, further restructuring, job cuts and factory closures are just as unthinkable for governments in a continent grappling with high unemployment.
To prove their point, many executives point to the contrast with the US market, where after the bankruptcy of GM and Chrysler and near-collapse of Ford, three companies shut down factories and renegotiated pay terms with trade unions. Today, stripped of the excess capacity, all three are posting healthy profits. A similar solution in Europe appears unworkable.
“In times of crisis, governments have one interest, and that is to keep employment . . . that’s the prime interest of most of the governments in Europe,” says ACEA’s Mr Hodac. “The European commissioner does not have any instruments to deal with this situation. It’s very much fragmented, and shows the fragmentation of Europe.”
In lieu of a collaborative effort, executives are doing everything they can to muddle through.
Renault – like Peugeot dangerously dependent on the French, Spanish and Italian markets that have been hardest hit by the sales slowdown – is cutting its headcount by 7,500 by 2016, and getting some help from its Japanese partner Nissan, which has asked Renault to build some of its cars and engines.
“We are fixing it step by step,” says Carlos Tavares, chief operating officer of Renault, which will build 82,000 Nissan Micras at its Flins factory from 2016. “It’s about efficiency . . . We just need to challenge and ask people to do a better job.”
In Italy, Fiat is sending workers home to collect a special state benefit rather than sacking them, as the country’s factories run at less than 50 per cent capacity, the lowest in Europe.
“Maybe if they could act as totally free companies without any political regulation or influence, then they would close down the factories faster,” says Eric Heymann, senior economist at Deutsche Bank in Frankfurt. “There are still some discussions ongoing . . . I wouldn’t be surprised if there are some more closures in the next one to two years.”
Ford has says it has no plans to cut more capacity in Europe, but is constantly monitoring the situation.
“I would like to see Europe not stand in the way of what has to be done,” says Mr Odell, whose wood-panelled executive corridor is now protected by reinforced glass and a steel security airlock. “A mathematician would agree . . . but politics and mathematics don’t always follow the same path.”
Why Tesla is charging ahead of the EV pack
In a remarkable three month period, Tesla Motors has gathered seemingly unstoppable momentum and while there are roadblocks ahead, it is now undoubtedly the pin-up for the clean tech sector.
During this period the Elon Musk-led group has announced its first ever quarterly profit and surpassed sales expectations. It has received the highest ever rating from Consumer Reports – for any vehicle type. It has drummed up enough interest to raise $1 billion from investors, helping to pay off a US Department of Energy loan in full, with interest and nine years ahead of time. Most crucially it has made believers out of the fence-sitters.
Investors have responded with giddiness, sending the company’s stock from $35 in March to a record high of $110.33 overnight. The plentiful short sellers have been burned, badly.
Figure 1. Tesla share price (year-to-date)
Source: Yahoo Finance
Tesla is now valued at almost $13 billion, about triple where it was at the start of the year. The electric car maker, which will manufacture a little over 20,000 cars this year, is now valued at around a quarter of General Motors, which produces close to 10 million. Were it listed in Australia, its current valuation would have it knocking on the door of entry into the ASX20. Not bad for a “loser” company, as presidential contender Mitt Romney famously labelled it last year.
Even the two negative stories it has encountered this year have been at worst neutralised, and arguably turned into positives. Firstly, there was a critical New York Times review of its flagship Model S vehicle, which the company countered effectively by showing the flaws with the analysis. Then there were pockets of criticism over its innovative leasing option, which it tackled by admitting to one or two flaws and addressing them.
Yes, it’s been a good year.
Staggering when you factor in the troubles of electric car groups to gain a foothold as the likes of Fisker, Coda and Better Place declare, or near, bankruptcy. Battery maker A123 Systems also sought court protection, before being reincarnated with the new name of B456 Systems last week.
Tesla’s triumphs where others have failed have the swelling Musk fan club cheering and the many doubters questioning their scepticism.
There are a number of reasons why it has separated from the pack:
— Leadership. Founder Elon Musk knows what he is doing having achieved success with numerous other start-ups, most famously as co-founder of PayPal. He has a personality that captures media attention and this has meant Tesla has long received more publicity than its size would normally merit. Not only that, he backs up his confident words with money, always stumping up cash – and plenty of it – when Tesla looks to raise capital.
— Strategy consistency. At its heart Tesla has always had a sound plan, which it has stuck to without rushing to meet the demands of investors hungry for weekly developments. In 2006, Musk divulged, “the strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model. In keeping with a fast growing technology company, all free cash flow is plowed back into R&D to drive down the costs and bring the follow on products to market as fast as possible.” So far, so good.
— Steady development. Tesla is building out a network of fast-charging stations to improve convenience, but it has not tried to do this too fast. It has largely put attention into US states where adoption is likely to be highest and branch out from there, California in particular has plenty of charging stations and is Tesla’s key market. You can’t build an electric car empire in a day.
— Customer engagement. Tesla owners don’t just like the car, they love it, with Musk’s enthusiasm trickling through to the owners of his cars. Tesla has also fostered a community within its ownership group. As just an example of the community development, its forum about the Model S includes around 100,000 posts. Not only that but it cuts out the middlemen (car dealers), which allows it to have control over the customer relationship.
— Quality in production. In the Model S, Tesla has built an amazing car, not just an amazing electric car. The awards speak for themselves.
Many young companies are at risk of complacency after turning their first profit, the start of a steady spiral back down to Earth. That or they look to cash in on the first takeover offer that comes along, eyes left dazzling by the prospect of a quick buck.
Tesla seems unlikely to fall into either trap.
The company’s long-term plan has always been clear – to create in Musk’s words “a compelling, mass market electric car.” First step was the sporty Roadster, then the luxury Model S. Both of those have launched with the next car – the Model X (SUV) – to grace American roads in 2014. Like the first two cars, it looks impressive, but it won’t decide the company’s future.
Car number four – the yet to be named mass market vehicle – will be the gamechanger.
As Musk explained to Bloomberg earlier this month, there are currently two compromised choices for electric car consumers and it means they don’t have a wider enough appeal.
He says the Model S is “compelling but it’s too expensive for most people and (then) you’ve got the Nissan leaf, which is cheap but it’s not great.”
It’s hard not to focus on the positives as things rush forward at a pace that even Musk didn’t foresee, but until the company completes the vision of an affordable, mass-market car that people love, it has not truly succeeded.
And there are challenges to reaching that goal in the form of car dealer backlash, brand value risks and technological development.
On the first score, there is growing unease in the US amongst auto dealers about the Tesla strategy to bypass them. The National Automobile Dealers Association is one of the more powerful lobbying groups in the country and has already coerced a number of Republicans to be publically sympathetic to their complaints. The fight is just heating up with battlefronts already surfacing in a couple of states.
Tesla also has to assess the risk to brand value of going down market. At the moment the Model S would fit into the luxury car category, attracting affluent consumers. When it offers a mass market car around $30,000 cheaper than its current cheapest cars, will it damage the allure of the brand? Then again, would the company care as long as the mass market car is successful?
The final risk is a combination of technology and over-confidence.
Cost has always been the barrier to a compelling, mass market EV and while the technological advances are obvious, Tesla still has a lot of work to do to achieve the goal. It will take several years to reach it and the company must also be careful not to rush into mass production at the expense of quality.
Provided it remains patient however, the next great car manufacturer is likely evolving right before our eyes.
Product Life Cycle
Blue ocean http://www.youtube.com/watch?v=clp-IMpuwaQ